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Responsible downsizing strategy as a panacea to firm performance: the role of dynamic capabilities Philip Cheng-Fei Tsai International Business Administration, Wenzao Ursuline University of Languages, Kaohsiung, Taiwan, and
Chih-Ting Shih
Responsible downsizing strategy 1015 Received 19 July 2013 Revised 19 July 2013 Accepted 19 July 2013
Department of Business Administration, National Pingtung Institute of Commerce, Pingtung, Taiwan Abstract Purpose – A subject of continuous debate in the field of organizational change research and management practices is on whether downsizing strategies result in improved firm performance. The purpose of this paper is to propose and empirically examine dynamic firm capabilities as a major missing mechanism of firm performance. Design/methodology/approach – This study uses the data of 154 Taiwanese firms that employed an organizational downsizing strategy as the sample for testing the research question. Findings – The results indicate that a responsible downsizing strategy can result in greater firm performance for the development and enhancement of dynamic firm capabilities. Originality value – This research introduces dynamic capabilities into the downsizing context, and the empirical results provide new theoretical insight into downsizing and dynamic capabilities research, suggesting that downsizing should be regarded by management as resource management rather than a cost-cutting action. Keywords Firm performance, Downsizing, Responsible restructuring strategies, Dynamic capabilities, Strategic human resource management Paper type Research paper
Introduction Since the 1980s, organizational downsizing has been one of the most common radical management strategies worldwide (e.g. Cascio, 2002; Tsai and Yen, 2008; Datta et al., 2010; De Meuse et al., 2011). However, numerous studies have indicated that downsizing has not provided sufficient evidence of associated performance benefits (e.g. Peter, 2005). Therefore, downsizing has become controversial among firms (e.g. Cascio, 2002; Lowe, 1998; Guthrie and Datta, 2008; Mun˜oz-Bullon and Sanchez-Bueno, 2011) and has harmed thousands of employees economically, physically, and psychologically. Furthermore, downsizing has negatively affected numerous families of employees and has created a significant social tension (e.g. Naumann et al., 1995; Mckee-Ryan and Kinicki, 2008). Therefore, this issue requires special attention. Interest has been increasing rapidly in the employee-centered comprehensive organizational downsizing strategy in the past decade (e.g. Cameron, 1994; Freeman, 1999; Appelbaum et al., 1999; Cascio, 2002). Researchers have asserted that the downsizing strategy should accompany a mindset of “employees as assets to be developed” rather The authors would like to thank the editor and the reviewers for their helpful comments on an earlier version of the paper.
International Journal of Manpower Vol. 34 No. 8, 2013 pp. 1015-1028 r Emerald Group Publishing Limited 0143-7720 DOI 10.1108/IJM-07-2013-0170
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than “employees as costs to be cut.” A firm’s capability in creating more customer value in the post-downsizing period is more important than simply cost-cutting. Downsizing should be implemented responsibly to boost firm performance and reduce harm to employees in the post-downsizing period. Numerous studies have supported this concept (e.g. Naumann et al., 1995; Beam, 1997; Gowing et al., 1998; Shah, 2000; Chadwick et al., 2004). Cascio’s contention is particularly referred to and arises from numerous successful cases that analyzed 6,418 downsized firms. This type of downsizing strategy is referred to as “responsible downsizing strategy.” However, several scholars have warned that the interventional mechanisms between actions and outcomes are significant to the development of academic theories and firms’ applications of these theories (e.g. Christensen and Raynor, 2003). To date, the interventional mechanisms between a responsible downsizing strategy and firm performance are scantly known. Dynamic capabilities have been asserted in the strategy and strategic human resource management (SHRM) research fields during in past decade (e.g. Teece et al., 1997; Oliver and Holzinger, 2008; Easterby-Smith et al., 2009; Danneels, 2011), which represent key organizational capabilities that firms can implement for achieving competitive advantages through their reconfiguration of internal and external resources. This concept is the key mediator between strategic firm human resource management (HRM) practices and firm performance (e.g. Wright et al., 2001). However, certain studies introduce dynamic capabilities into the downsizing context, exploring its potential role in mediating the relationship between responsible downsizing strategies and firm performance. Therefore, this study introduces dynamic capabilities as a mediator and examines whether a firm’s responsible downsizing strategy can assist in developing and improving a firm’s dynamic capabilities, resulting in improved firm performance; that is, do dynamic capabilities function as the critical “black box” between responsible downsizing strategies and firm performance? The empirical examination of this revolutionary study can provide a more solid explanation on the complex relationship between downsizing strategies and firm performance. The finding indicated that this new theoretical insight can contribute to a responsible downsizing theory and dynamic capabilities, and provide an important consideration for managerial decisions during downsizing. Theory and hypotheses Responsible downsizing strategy and firm performance Organizational downsizing has been a common strategy in the business world from the 1980s, particularly during an economic decline (e.g. Cascio, 2002; Tsai and Yen, 2008; Datta et al., 2010; De Meuse et al., 2011). Although previous studies have noted that firm performance following organizational downsizing is strongly changed (e.g. Rigby, 2002), most downsizing strategies in extant studies have focussed on various types of downsizing strategies, their development, and their potential influence on downsizing success (e.g. Greenhalgh et al., 1988; Cameron et al., 1993; Dewitte, 1998; Freeman, 1999; Appelbaum et al., 1999). Previous studies have provided insufficient direct evidence of how these strategies improved firm performance. Several studies have suggested that firms adopting a cost-cutting-oriented downsizing strategy failed to boost firm performance (e.g. Cameron, 1994; Freeman, 1999; Appelbaum et al., 1999; Cascio, 2002). A downsizing strategy should serve as a comprehensive strategy that comprises the mindset, policies, and action plans.
This strategy implements and evaluates downsizing based on the core concept of a considerate firm that provides long-term payoffs and regards employees as long-term assets by responsibly managing downsizing rather than irresponsibly taking short-term cost-cutting actions. The Cascio’s (2002) study of 6,418 downsized cases of S&P surveys conducted between 1982 and 2000 introduced strategies for responsible restructuring and an inductive research method to summarize common threads in successful downsizing cases: reducing workforce as the last resort (the cost leadership strategy should be the last choice); continually invest in business development; keep the best employees and respect other employees; provide outplacement assistance to laid-off employees, such as training, consultation, and job-seeking assistance; continually innovate and foster the capability to change business models; and focus on business strategies, markets, and rapid changes in customer and economic environments. These successful downsizing strategies are similar to the differentiation strategy. Cascio (2002) referred to these differentiation strategies as “responsible structuring.” This differentiation strategy is evidently more effective than the cost leadership strategy in the context of organizational downsizing. We identified this type of differentiation strategy as a “responsible downsizing strategy” based on Cascio’s studies and by referring to other similar advocators, which are characterized by four common attributes: first, long-term mindset – firms should invest in their employees by considering a firm’s long-term payoff; second, strategy for organizational change – organizational capabilities are carefully assessed before downsizing, and an appropriate strategy is selected for the duration of organizational change, such as reducing only the workforce, implementing a reengineering program, or changing the entire system; third, employee participation and procedural justice – during the implementation process, firms encourage employee participation and involvement to ensure sufficient communication and maintain justice in selecting employees for layoffs; and fourth, employee-caring HR practices – firms should properly consider employees, motivate them, and provide outplacement assistance for laid-off employees. Such treatment allows employees to perceive organizational support. These common attributes show that the downsizing strategy comprehensively provides a broad range of downsizing activities to ensure firm performance and invokes the considerate mindsets and practices of employees. Numerous studies have indicated that responsible downsizing strategies benefit firm performance, suggesting that a responsible downsizing approach achieves successful downsizing because it continues investing in business development, retains the best employees and respects other employees, provides outplacement assistance to laid-off employees (such as training, consultancy, and job-seeking assistance), and continually innovates and fosters the capability to change business models (e.g. Naumann et al., 1995; Beam, 1997; Gowing et al., 1998; Shah, 2000; Chadwick et al., 2004). Based on existing literature, we conclude that a responsible employee-oriented downsizing strategy is a differentiation strategy that can improve firm performance and properly regard employees. However, the limited number of inconclusive empirical studies prevents an easy conduction of a deductive examination; thus, a direct empirical examination is performed to test this theory and assist in its development. Therefore, this study provides the following hypothesis: H1. A responsible downsizing strategy is positively associated with firm performance.
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The question regarding the black boxes between a responsible downsizing strategy and firm performance remains because the interventional mechanisms between actions and outcomes are significant for the development of academic theories and management practices. Certain scholars (e.g. Dewitte, 1998) have argued that downsizing strategies determine the organizational structure that links management decisions regarding the internal administrative process and raises the possibility of improving firm performance. Internal administrative processes (or work processes) have often been termed “dynamic capabilities” in the recent strategy research field. Therefore, is dynamic capability the chief “black box” between a responsible downsizing strategy and firm performance? Dynamic capabilities, responsible downsizing strategies, and firm performance Teece et al. (1997) initially proposed that dynamic capabilities can improve firm performance. They devised the concept from the resource-based view (RBV) by Barney (1991) and defined dynamic capabilities as a firm’s “ability to integrate, build, and reconfigure internal and external competences for addressing rapidly changing environments.” Furthermore, this ability is necessary to acquire external resources, differing significantly from the RBV (e.g. Di Stefano et al., 2010; Pavlou and El Sawy, 2011). Resources require reintegration and reallocation through specific business processes to be effective (e.g. Eisenhardt and Martin, 2000), which are strategic organizational routines (Winter, 2003; Zhou and Li, 2007). Previous studies have suggested that inappropriate downsizing strategies harm a firm’s human capital, social capital, organizational capital, and business processes (dynamic capabilities) embedded in their intellectual capital (e.g. Cameron, 1994; Fisher and White, 2000). Evidence has shown that downsizing reduces overall employee job dissatisfaction, commitment to the organization, and performance; thus, employees have a tendency to resign because they perceive an inadequate future (e.g. Shah, 2000). Conversely, an appropriate and responsible downsizing strategy improves a firm’s dynamic capabilities. First, a responsible downsizing strategy allows firms to retain their best employees and invest in employees by training them and their managers in new operating methods, which enables firms to maintain and develop human capital and organizational capital (e.g. Cascio, 2002). Second, a responsible downsizing strategy is advised for carefully considering the rationale behind downsizing and the firm’s ability to serve its customers, assisting in avoiding harmful business processes, and strengthening dynamic capabilities (e.g. Gowing et al., 1998; Shah, 2000). Furthermore, a responsible downsizing strategy assists firms in addressing and managing downsizing concerns from certain groups of stakeholders such as employees, customers, suppliers, and the local community, thereby avoiding damaging the firm’s social capital and obtaining more external resources that improve the firm’s dynamic capabilities (e.g. Cascio, 2002; Naumann et al., 1995; Beam, 1997). A responsible downsizing strategy encourages employers to carefully examine all HRM practices and consider the strategy or environmental changes the firm encounters for improving both the learning and innovation ability of employees and organizations. These HRM practices can generate the required adjustments and improve the labor force, division of labor, employee mobility patterns, and methods of managing new challenges for firms. All of these actions strengthen a firm’s ability to cope with dynamic market changes (e.g. Cascio, 2002; Cameron, 1994). Therefore, a responsible downsizing strategy enables firms to create and enhance their dynamic capabilities. Kaplan and Norton (2004) argued that these internal processes (dynamic capabilities) are the pivotal mechanism in transferring intangible assets between
employees, and they transform organizational relationships into a sustained shareholder value by improving firm performance. Wright et al. (2001) indicated that these processes that are embedded in intellectual capital, such as human capital, social capital, and organization capital, are the key interventional mechanisms between strategic HRM practices and a firm’s core competencies. This contention suggests that, a responsible downsizing strategy that is a critical organizational-level HRM strategy may improve dynamic capabilities and firm performance. Similar contentions in several studies also support this concept. Furthermore, downsizing differentiation strategy supporters have argued that a successful downsizing strategy should enhance a firm’s organizational capability and ensure firm performance (e.g. Cameron, 1994; Freeman, 1999; Appelbaum et al., 1999; Cascio, 2002). The Hamel and Prahalad (1994) study entitled “Competing for the future” indicated that only implementing organizational restructuring cannot successfully transform firms. Establishing and applying new strategies, concepts, and business processes assists firms in competing in dynamic changing environments and creates exceptional future performance. Kaplan and Norton (2006) concurred with this argument and suggested that solely implementing organizational restructuring cannot improve firm performance because of its significant cost and uncertain outcome. Improving the management system that emphasizes strategic business processes is a method for improving firm performance. Several studies have indicated that a responsible downsizing strategy positively influences firm performance and the dynamic capabilities, and that dynamic capabilities are the critical mechanism between business activities and performance. Therefore, these variable relations were consolidated into a model in which a responsible downsizing strategy develops and a firm’s dynamic capabilities improve, resulting in improved firm performance; that is, dynamic capability is the black box between a responsible downsizing strategy and firm performance. The proposed model is shown in Figure 1. The following hypothesis is proposed:
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H2. A firm’s dynamic capabilities mediate the relationship between a responsible downsizing strategy and firm performance. Methods Data collection and sample The sample in this study regarding firms’ strategy business units (SBUs) underwent practical downsizing. These firms are Taiwanese-owned firms and subsidiaries of multinational corporations (MNCs) and comprise various business strategies, dynamic capabilities, and strategic decisions that are responsible for financial performance. The sample was extracted from several sources: the “2003 Corporate Downsizing Survey in Taiwan,” conducted by the Council of Labor Affairs (Taiwanese central government’s labor department), in which 690 firms reported their downsizing
Responsible downsizing strategy · Long-term mindset · Strategy for change · Procedural justice · Employee-caringHR practices
Dynamic capabilities
Firm performance
Figure 1. Structural model of responsible downsizing strategy, dynamic capabilities, and firm performance
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practices; the “Downsizing strategy survey of foreign companies in Taiwan in 2001” was conducted by an international business consulting company, in which 104 firms reported their downsizing practices; and the “Top 300 Foreign Enterprises List in Taiwan in 2004” was conducted by the China Credit Information Service and was used to boost the low response rate in gathering firm-level data (Hambrick, 1995). Anonymous questionnaires were mailed to firm executives. This study defined “executives” as CEOs and executives who report directly to the CEO including the president and vice president at corporate and SBU levels, which is consistent with previous studies (e.g. Hambrick, 1995). Despite the difficulties in obtaining multiple executive-level responses from firms in Taiwan, at least two executives in each firm were invited to participate in our survey to reduce single-respondent bias, including the executive responsible for decision making in business performance and the executive in charge of a firm’s HRM strategy. Executives were requested to answer items regarding dynamic strategy capabilities and firm performance, and HR heads answered items regarding responsible downsizing strategies to reduce common method bias (Podsakoff et al., 2003). The sample included local firms and MNC subsidiaries. Therefore, bilingual questionnaires were provided to the MNCs, and Chinese questionnaires were provided to the local firms. Formal questionnaires were delivered to firms by post or by e-mail. A follow-up was performed by phone, or a second mail was sent after three weeks. A total of 190 firms returned the survey and resulted in a final sample of 154 firms after the exclusion of invalid questionnaires. The firms in the final sample were from a vast range of industries (48.7 percent were manufacturers, 24 percent were high-tech firms, 24.7 percent were from the service sector, and 2.6 percent were from other industries), ownership types (57.8 percent were local corporations, 29.9 percent were foreigninvested corporations of MNCs, and 12.3 percent were joint ventures), firm sizes (27.3 percent had 100 employees or fewer, 34.4 percent had 101-500 employees, and 38.3 percent had 500 employees or more), and downsizing scales (36.4 percent were performing small-scale workforce reductions of 5 percent or less, and 63.6 percent were performing large-scale workforce reductions of 5 percent or more). Studies indicated that the firm-level sample comprising multiple survey respondents generally comprised fewer than 100 firms (e.g. Simons et al., 1999). Therefore, the sample of 154 firms is sufficient and involved multiple informants and heterogeneous firms from various industries, sizes, ownerships, and downsizing sizes for increasing the applicability of insights and generalization. Measures Dynamic capabilities This study developed a scale using several steps because well-developed scales are scarce. First, seven measures were operationalized and generated based on the concept of the Kaplan and Norton (2004) strategy readiness by adopting a deductive approach. This concept is referred to as the extent to which organizations support internal processes by using human capital, information capital, and organization capital. Second, 24 experts (i.e. eight executives, seven HRM practitioners, and ten academic scholars) were invited to ensure the validity and practicality of the items. Subsequently, they suggested including three additional items to extensively cover the contention of the Kaplan and Norton (2004) study regarding a firm’s exertion of external resources in the literature on dynamic capabilities; thus, the scale was composed of ten items (Table I) using a seven-point scale that ranged from 1 (strongly
Items 1. To what extent does your company possess sufficient specific strategic processes to create competitive advantage? 2. To what extent does your company possess sufficient human capital to create and implement strategic processes? 3. To what extent does your company possess sufficient information systems to support strategic processes? 4. To what extent do your employees recognize and commit to company core values? 5. To what extent do your employees use and share internal and external knowledge? 6. To what extent does your company own networks to obtain external resources (including strategic alliance)? 7. To what extent do all of your managers accomplish company strategies and business objectives? 8. To what extent do the behaviors of your employees change in response to strategic requirements? 9. To what extent can your company improve customer loyalty in a highly dynamic market? 10. To what extent do your employees recognize and commit to company strategies?
Standard loading Unstandard loading t-value
0.76
0.98
10.93
0.73
0.94
10.26
0.79
1.09
11.56
0.72
0.76
10.11
0.70
0.83
9.66
0.78
1.01
11.39
0.78
0.91
11.27
0.83
1.10
12.47
0.80
0.93
11.67
0.80
0.87
11.64
Notes: Goodness of fit: w2 ¼ 118.23 (df ¼ 34, po0.01), CFI ¼ 0.92, NNFI ¼ 0.90, AGFI ¼ 0.81, RMSEA ¼ 0.11, SRMR ¼ 0.04
disagree) to 7 (strongly agree). A pilot test was implemented for the 44 respondents including executives and HRM department heads from various industries before the formal survey. Confirmatory factor analysis (CFA) was performed to assess construct validity. Table I shows that the resulting CFA indicated good psychometric properties [w2 ¼ 118.23 (df ¼ 34, po0.010, CFI ¼ 0.92, NNFI ¼ 0.90, AGFI ¼ 0.81, RMSEA ¼ 0.11, SRMR ¼ 0.04)][1], except for the significance of the w2 value, which was sensitive to sample size, and therefore, comparatively unreliable. Cronbach’s a for this scale was 0.94, indicating good reliability. Responsible downsizing strategy We adopted a scale developed by Tsai and Shih (2013). The HRM department heads were requested to rate the extent to which their firms had implemented a responsible downsizing program on a seven-point Likert scale (ranking from 1 as strongly disagree to 7 as strongly agree). The scale contained three items regarding the mindset of employees as long-term assets (a ¼ 0.77), three items regarding the strategy for organizational change (a ¼ 0.83), three items regarding employee participation and justice during the process (a ¼ 0.77), and three items regarding employee-oversight HRM practices (a ¼ 0.73). CFA results suggested that the model fits all falls within an acceptable range [w2 ¼ 247.78 (df ¼ 108, po0.01), CFI ¼ 0.90, NNFI ¼ 0.88, RMSEA ¼ 0.09, and SRMR ¼ 0.07].
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Table I. Confirmatory factor analysis for dynamic capability
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Firm performance Respondents were requested to evaluate according to the firm’s average performance within three years after downsizing and was based on the Kaplan and Norton (2004) study: “To what extent has your company improved its cost structure?”; “To what extent has your company increased asset utilization?”; “To what extent has your company expended revenue opportunities?”; and “To what extent has your company promoted the customer value of products and services?” An additional item querying “To what extent has your company improved employee productivity (profitability/no. of employees)?” was added. Each item was assessed using a seven-point Likert scale (Cronbach’s a ¼ 0.73). Previous studies indicated that perceptual performance measures are significantly related to objective measures (e.g. Delaney and Huselid, 1996)[2]. The resulting CFA indicated an acceptable construct validity and good model fitness [w2 ¼ 9.54 (df ¼ 4, po0.01), CFI ¼ 0.99, NNFI ¼ 0.98, AGFI ¼ 0.91, RMSEA ¼ 0.09, SRMR ¼ 0.02]. Control variables This study examined several variables. Several studies indicated that the firm size (number of employees) and percentage of workforce reduction (percentage of workforce reduction relative to all employees) may affect downsizing decisions and performances (e.g. Budros, 1999; Filatotchev et al., 2000). Furthermore, previous studies have suggested that an organization’s life cycle stage (measured by nascent, rapid growing, maturity, and decline stages) and industry (measured by manufacturing, service, and high-technology sectors) influence the method of downsizing strategy (e.g. Dewitte, 1998; Adizes, 1994; Filatotchev et al., 2000). Results Table II shows the means, standard deviations (SDs), and intercorrelations of the variables examined in this study. Significant correlations existed among responsible downsizing strategies, dynamic capabilities, and firm performances, which was consistent with our hypotheses. The results provided the foundation for further evaluation. This study used hierarchical regression analysis for formal testing of the hypotheses by following the recommended procedure for testing the mediation effect from the Baron and Kenney (1986) study. Four models were separately assessed, and each involved control variables. Table III shows that a responsible downsizing strategy significantly and positively influences firm performance (b ¼ 0.40, po0.001; Model 3.1), which supports H1. The results shown in Table III indicate that a responsible downsizing strategy is positively and significantly related to dynamic capabilities (b ¼ 0.48, po0.001; Model 1), and dynamic capabilities are significantly positively related to firm performance Variable
Table II. Means, standard deviations, and correlations
1. Dynamic capabilities 2. Firm performance 3. Responsible downsizing strategy
Mean
SD
1
2
3
5.13 4.88 5.13
0.82 1.20 0.82
(0.94) 0.77 0.63
(0.92) 0.55
(0.76)
Notes: n ¼ 154. Composite reliability is reported on the diagonal. Latent variable intercorrelations are shown. Standardized correlation coefficients equal or exceeding 0.52 in the table were significant at the po0.05 level
Model 1 Dynamic capabilities Control variables Firm size Workforce reduction (%) Industry-manufacturinga Industry-servicea Life circle stage-nascentb Life circle stage-rapid growinga Life circle stage-declineb Independent/mediator variable Responsible Downsizing strategy Dynamic capabilities F R2 Adj. R2 DR2 (F-test)
0.22** 0.12 0.13 0.01 0.00 0.04 0.05
Model 2 Firm performance
0.03 0.04 0.13 0.12 0.05 0.09 0.02
0.48*** 8.76*** 0.38 0.33
0.73*** 16.74*** 0.54 0.50
Model 3.1 Firm performance
Model 3.2 Firm performance
VIF
0.17**** 0.11 0.20**** 0.09 0.08 0.04 0.01
0.01 0.13**** 0.12 0.11 0.09 0.07 0.02
1.25 1.21 1.69 1.67 1.21 1.10 1.31
0.40***
0.05 0.72*** 15.54*** 0.55 0.51 0.33 (84.32)
1.45 1.58
4.04*** 0.22 0.16
Notes: n ¼ 154. aDummy variables for industry; contrast group is high technology; bdummy variables for life circle stage; contrast group is maturity stage. Standardized coefficients are reported. *po0.05; **po0.01; ***po0.001; ****po0.10
(b ¼ 0.73, po0.001; Model 2). Model 3.2 shows that a responsible downsizing strategy becomes non-significant when dynamic capabilities are introduced (b ¼ 0.05, ns). However, dynamic capabilities remain significant (b ¼ 0.72, po0.001); thus, H2 is confirmed. Dynamic capabilities explain 33 percent of the unique variance (DR2 ¼ 0.33, DF ¼ 83.32, po0.001), and the entire model accounts for 55 percent of the variance in firm performance (R2 ¼ 0.55, F ¼ 15.54, po0.001). These findings indicate a full mediation from dynamic capabilities to the relationship between a responsible downsizing strategy and a firm’s performance through dynamic capabilities. Discussion This study was motivated by a desire to understand the role of firms’ dynamic capabilities in explaining and predicting the cause-effect relationship between a responsible downsizing strategy and a firm’s performance. The results of this study support the notion that a responsible downsizing strategy results in greater firm performance through the development and improvement of firms’ dynamic capabilities. First, the support for H1 is crucial because the deductive method to support the contention by Cascio was developed from the induction results, which indicated that responsible downsizing strategies can successfully improve firm performance. Second, the result indicates that a more responsible downsizing strategy results in greater dynamic capabilities, which can be developed and fostered. This result provides meaningful insights for distinguishing the responsible downsizing strategy from the other downsizing strategies discussed in this study. This implication is significant for scholars and practitioners because it indicates that a responsible downsizing strategy should focus on dynamic capabilities for improving its business model and serving its customers.
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Table III. Results of hierarchical regression analysis
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This result proves that dynamic firm capabilities improve firm performance. This result confirms the strategy argument of SHRM scholars, which states that a firm’s dynamic capabilities are the key mechanism for creating a sustained competitive advantage and is the basis of firm performance (e.g. Teece et al., 1997; Eisenhardt and Martin, 2000; Winter, 2003; Kaplan and Norton, 2004; Wright et al., 2001). The support for H2 indicates that a firm’s dynamic capabilities mediate the relationship between strategies for a responsible downsizing strategy and firm performance. This result has several important implications for both academic research and business management practices. This finding assists in understanding the longstanding confusion in the field of organizational change, and specifically assists in determining why the relationship between a downsizing strategy and a firm’s performance cannot be identified. Furthermore, this finding supports the assertion from the strategy field in 1994, which indicates that only organizational restructuring cannot be used to successfully transform firms (Hamel and Prahalad, 1994). However, establishing and applying new strategies and concepts allows firms to compete in the current dynamically changing environment and create a premium future performance. Using a firm downsizing strategy as a comprehensive and employee-oriented cause-and-effect responsible downsizing strategy can ensure firm performance by fostering the construction of dynamic capabilities. Furthermore, this finding confirms the argument made by certain scholars of organizational change, which asserts that a people-oriented downsizing strategy is more successful than an economic-oriented strategy (e.g. Naumann et al., 1995; Beam, 1997; Gowing et al., 1998; Shah, 2000). Furthermore, this hypothesis responds to the urgent request for attention by Christensen and Raynor (2003) to the interventional mechanism between managerial practices and firm performance. The results of this study suggest that both academic and business realms carefully assess the causal mechanism between a responsible downsizing strategy and firm performance before development and implementation. Finally, this study highlights the importance of interdisciplinary integrations and indicates that concepts from other fields may be the solution to longstanding issues in this field. This study suggests for the business world that improving dynamic firm capabilities ensures firm performance; thus, the development and implementation of a downsizing strategy should carefully consider whether dynamic firm capabilities can be strengthened. Firms should accurately evaluate their own internal and external resources and the environment for developing suitable strategies and actions. Prevailing strategies or so-called best practices adopted by certain benchmarked companies should not be implemented. Downsizing strategies may fail to improve firm performance and can harm employees and their families, and even cause social chaos. Conclusion This study examines an interdisciplinary ground and indicates that dynamic capabilities behave as the important black box between a responsible downsizing strategy and firm performance. This finding provides a solid explanation for the longstanding perplexing relationship. Implications for research The main contribution of this study is in its introduction of dynamic capabilities into the downsizing context and provision of new empirical evidence, which proves that firms’ downsizing strategies should be implemented through the development and improvement of their dynamic strategic capabilities, thereby improving firm
performance. This finding suggests that a responsible downsizing strategy must be a suitable resource management decision for improving a firm’s performance. This is in accordance with the Sirmon and Hitt (2009) study, which stated that resource management through asset orchestration is vital for superior performance. Therefore, we consolidated theoretical thinking and empirical results from various disciplines to establish a foundation for the theory of “downsizing-dynamic capabilities-firm performance.” Implications and suggestions for management practice The findings in this study suggest that an employee-oriented comprehensive downsizing strategy and a responsible downsizing strategy are required to facilitate dynamic firm capabilities and ensure firm performance. Therefore, managers are advised to regard downsizing strategies as management resources rather than cost-cutting actions. However, differences in the scope of related diversification in firms can be accounted for by the differences in their dynamic capabilities, which is a similar contention to that by Døving and Gooderham (2008). Firms possess various levels of internal and external resources, and they should carefully design and implement suitable downsizing strategies for improving dynamic firm capabilities, to ensure a firm’s performance in specific business environments. Limitations and suggestions for future research The results of this study are important for both research and practical purposes, but their generalizability is limited. Practical difficulties are present when collecting first-hand data from firms for several reasons. First, the sample was limited to firms that actually reduced their workforce. This significantly reduced the portion of target firms. Second, the sensitivity of the topic of downsizing caused the firms to become hesitant when responding to the questionnaires. Third, data were gathered from various respondents by requesting that both top management executives and HR department heads complete and return questionnaires to reduce a perceptual measurement bias. However, this forced the elimination of single-source cases and reduced the sample size. Therefore, the sample of 154 cases may represent a relatively small portion for the generalization capability of the results. Nevertheless, the final sample is reasonably large in a statistical sense. Another limitation of this study is that the data were collected from a single period. Several studies have suggested employing a longitudinal method for analyzing the downsizing outcome. For example, Allen et al. (2001) used three periods for measuring the survivor reaction to organizational downsizing, and Cascio (2002) used a long-range temporal comparison for measuring firm performance. Furthermore, Easterby-Smith et al. (2009) suggested the necessity of a longitudinal study for examining the consequences of dynamic capabilities. Moreover, although we integrated firm sizes, downsizing ranges, stage of life circles, and industries on firm performance, we cannot use the results to dismiss the possible influence of a firm’s business strategy and long-term debt. Although the results have important implications for researchers and managers, they should be applied carefully when making predictions and generalizations, especially for firms in post-industrial societies. This is because we examined a sample from Taiwan, which is a nation that is currently transforming from a newly developed industrial society to a post-industrial one (even if nearly half of the sample comprised MNCs in Taiwan). Therefore, future research may use a more diverse national context for testing the relationship examined in this study.
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Notes 1. We evaluated construct validity and discriminant validity following Fornell and Larcker (1981). The multiple fit indices are the ratio w2 to degrees of freedom (w2/df), adjusted goodness of fit (AGFI), root mean square errors of approximation (RMSEA), standardized root mean residual (SRMR), the non-normed fit index (NNFI), and the comparative fit index (CFI; Bentler, 1990). 2. Despite the high correlation between subjective measures and objective measures, it should be acknowledged that subjective measures may contain a self-report bias and less information than objective performance. References Adizes, I. (1994), Corporate Lifecycles: How and Why Corporations Grow and Die and What to Do About It? Prentice Hall, Upper Saddle River, NJ. Allen, T.D., Freeman, D.M. and Russell, J.E.A. (2001), “Survivor reactions to organizational downsizing: does time ease the pain”, Journal of Occupational and Organizational Psychology, Vol. 74 No. 2, pp. 145-164. Appelbaum, S.H., Everard, A. and Hung, T.S. (1999), “Strategic downsizing: critical success factors”, Management Decision, Vol. 37 No. 7, pp. 535-552. Barney, J.B. (1991), “Firm resources and sustained competitive advantage”, Journal of Management, Vol. 17 No. 1, pp. 99-120. Baron, R.M. and Kenney, D.A. (1986), “The moderator mediator variable distinction in social psychological research: conceptual, strategic and statistical considerations”, Journal of Personality and Social Psychology, Vol. 51 No. 6, pp. 1173-1182. Beam, H.H. (1997), “Survivors: how to keep your best people on board after downsizing?”, Academy of Management Executive, Vol. 11 No. 2, pp. 92-94. Bentler, P.M. (1990), “Comparative fit indices in structural models”, Psychological Bulletin, Vol. 107 No. 2, pp. 238-246. Budros, A. (1999), “A conceptual framework for analyzing why organizations downsize?”, Organization Sciences, Vol. 10 No. 1, pp. 69-82. Cameron, K.S. (1994), “Strategies for successful organizational downsizing”, Human Resource Management, Vol. 33 No. 2, pp. 189-211. Cameron, K.S., Freeman, S.J. and Mishra, A.K. (1993), Downsizing and Redesigning Organizations, Oxford, New York, NY. Cascio, W.F. (2002), Responsible Restructuring. Creative and Profitable Alternatives to Layoffs, Berrett – Koehler Inc, San Francisco, CA. Chadwick, C., Hunter, L.W. and Walston, S.L. (2004), “Effects of downsizing practice on the performance of hospitals”, Strategic Management Journal, Vol. 25 No. 5, pp. 405-427. Christensen, C.M. and Raynor, M.E. (2003), “Why hard-nosed executives should care about management theory?”, Harvard Business Review, Vol. 81 No. 9, pp. 67-74. Danneels, E. (2011), “Trying to become a different type of company: dynamic capability at Smith Corona”, Strategic Management Journal, Vol. 32 No. 1, pp. 1-31. Datta, D.K., Guthrie, J., Basuil, D. and Pandey, A. (2010), “Causes and effects of employee downsizing: a review and synthesis”, Journal of Management, Vol. 36 No. 1, pp. 281-348. De Meuse, K.P., Marks, M.L. and Dai, G. (2011), “Organizational downsizing, mergers and acquisitions, and strategic alliances: using theory and research to enhance practice”, in Zedeck, S. (Ed.), Handbook of Industrial and Organizational Psychology, Vol. 30, APA Books, Washington, DC, pp. 729-768. Delaney, J.T. and Huselid, M.A. (1996), “The impact of human resource management practices on perceptions of organizational performance”, Academy of Management Journal, Vol. 39 No. 4, pp. 949-969.
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